56 Free and Fair How to Market Trade in America1 Daniel W. Drezner Since the end of the Second World War, the United States has been the undisputed leader in creating and fostering a multilateral trading system. With each passing decade, that regime has become more open and more encompassing. This would seem to be consistent with the general perception that Americans vigorously support free trade and Europeans are more suspicious of it. However, this perception masks an unpleasant truth – Americans view international economics through a mercantilist lens. That is to say, they view trade as a zero-sum game, in which one country's gain is another country's loss, and they therefore favour free trade when they are talking about exports and protectionism when they are talking about imports. The current brouhaha over offshore outsourcing has only calcified public hostility to the merits of free trade. Given the obvious benefits of trade liberalisation as a means of reducing global poverty,2 public hostility to economic liberalisation is a growing concern. These kinds of attitudes create a powerful constraint for policymakers at a delicate moment in global trade negotiations. Completing the Doha trade round will require significant concessions by U.S. trade negotiators on contentious political issues like farm subsidies. If public opinion is increasingly hostile to trade liberalisation, the current administration – as well as future administrations – might choose not to invest significant political capital in the process. The good news is that this is not an irreversible trend. A big reason why the American public has mercantilist attitudes towards foreign 1 A previous abridged draft of this article appeared in The New Republic Online, 25 June 2004. 2 For recent and cogent arguments to this effect, see Douglas Irwin, Free Trade Under Fire (Princeton: Princeton University Press, 2002); and Jagdish Bhagwati, In Defense of Globalization (New York: Oxford University Press, 2004); Martin Wolf, Why Globalization Works (New Haven: Yale University Press, 2004). Free and Fair 57 economic policy is that America’s political leadership talks about trade in a mercantilist fashion. Fortunately, two alternative political strategies are both viable and available. First, freer trade can be married to policies designed to protect those who bear a disproportionate share of the costs that come from liberalisation. Second – and more unique to the United States – trade agreements can be justified for reasons of grand strategy as well as economic efficiency. America’s hostility to free trade Public suspicion to trade liberalisation is not a recent phenomenon in the United States. Since the Second World War, there has been public suspicion about the merits of free trade even during boom times. In 1953 —a time when the U.S. was running a massive trade surplus—a plurality of Americans supported greater import restrictions over greater import expansion.3 In 1998 – when the latenineties boom was well under way – a majority of respondents agreed that, “foreign trade has been bad for the US economy.”4 Kenneth Scheve and Matthew Slaughter have catalogued a persistent fact throughout the late nineties; majorities of Americans repeatedly affirmed that: a) the costs from more imports always outweighed the benefits of more imports; and b) the costs from more imports exceeded the benefits from more exports.5 An iron law of trade politics is that during economic downturns, public suspicion of free trade policies explodes into public hostility. Inevitably, foreign trade becomes the convenient scapegoat for macroeconomic fluctuations that have little to do with trade. When faced with a choice between economic theories and statistical data showing that trade is good for the economy and anecdotes of job 3 The precise figure was 37% to 24%. Cited in I.M. Destler, American Trade Politics (Washington: Institute for International Economics, 1986), p. 5. 4 Kenneth F. Scheve and Matthew Slaughter, Globalization and the Perceptions of American Workers (Washington: Institute for International Economics, 2001), p. 21. 5 Ibid., chapter two. 58 Free and Fair losses due to import competition, American citizens follow the anecdotes.6 The debates over offshore outsourcing offer a pungent example of this public opinion phenomenon at work. In the first quarter of this year, the wave of negative reporting about offshore outsourcing reached tsunami levels. There was a rash of management consultant predictions about millions of job losses, combined with less-than-stellar numbers on employment. This appeared to justify a lot of hand wringing about offshore outsourcing and its potential effects on employment. The Democratic presidential primary also promoted a lot of talk about the evils of free trade, with John Kerry topping things off by bashing “Benedict Arnold CEOs.” Given this type of political environment, it is not surprising to find that a majority of Americans believe that offshoring is a problem. An Associated Press Poll in May 2004 found that 69 percent of Americans believe outsourcing hurts the U.S. economy. An Employment Law Alliance poll taken the same month found that 58 percent of American workers believe that the federal government should penalize companies that offshore work. A Watson Wyatt survey a few months later found 85% of American workers believing that offshoring has a negative effect on the U.S. economy.7 These attitudes are part of a broader trend towards protectionism among Americans. Between 1999 and 2004, public support for free trade declined across the board. The most dramatic shift in opinion came from Americans making more than $100,000 a year, among whom support for promoting trade dropped from 57 percent to 28 percent. A July 2004 poll conducted jointly by the Pew Research Center and the Council on Foreign Relations found that 84% of Americans thought protecting the jobs of American workers should 6 Daniel W. Drezner, “The Outsourcing Bogeyman,” Foreign Affairs 83 (May/June 2004): 22-34. 7 Employment Law Alliance, “Offshoring: Mad in the U.S.A.,” 7 June 2004. Accessed at http://www.employmentlawalliance.com/pdf/ELA_Offshore_Outsource_Poll_D1_5_25 _04.pdf, 6 August 2004; the Associated Press poll can be accessed at http://www.ipsos-na.com/news/pdf/media/mr040607-1tbzzz.pdf. Watson Wyatt, “Offshoring Labor,” 5 August 2004. Accessed at http://biz.yahoo.com/prnews/040805/phth035_1.html, 10 August 2004. Free and Fair 59 be a top priority of American foreign policy. The same month, the German Marshall Fund (GMF) poll concluded that only four percent of Americans supported the North American Free Trade Agreement (NAFTA). Americans are also less enthusiastic toward further international trade deals than Europeans. A high proportion of Europeans – 82% of French and 83% of British – want more international trade agreements, compared to just 54% in the US.8 This does not mean that the public is correct in its views on trade or offshore outsourcing. In June, another AP poll found that 57% of respondents believed the nation had lost jobs in the last six months, even though 1.2 million jobs had been created during that span. As for offshoring, the Bureau of Labour Statistics reported in June 2004 that this phenomenon was responsible for less than 2.5% of jobs lost through mass layoffs in the first quarter of this year -- not exactly a large number.9 Studies at the state and local level buttress this finding. In Colorado, one study found that to date offshoring's impact on IT jobs was exaggerated by media reports. In Detroit, another study concluded that outsourcing's effect on manufacturing jobs had been “overemphasized.”10 The net creation of over a million new private-sector jobs since January has also demonstrated that the effect of offshoring on the national economy is insignificant. Given the widespread support among economists for trade liberalisation, are Americans just stupid? Not really -- they're merely responding to how politicians talk about the topic. Both advocates and opponents of freer trade talk about the issue in a mercantilist framework. Politicians commonly address trade by discussing how 8 Shift in public opinion reported in Peronet Despeignes, “Enthusiasm for Free Trade Fades,” USA Today, 24 February 2004, p. A1. Pew/CFR survey available at http://www.cfr.org/pdf/CFRPEW.pdf (accessed 1 September 2004); John J. Audley and Hans Anker, Reconciling Trade and Poverty Reduction (Washington: German Marshall Fund of the United States, July 2004). 9 Bureau of Labor Statistics, “Extended Mass Layoffs Associated with Domestic and Overseas Locations,” 10 June 2004. Accessed at ftp://ftp.bls.gov/pub/news.release/reloc.txt, 6 August 2004. 10 Manuel G. Serapio, “IT’s not so Bad,” Rocky Mountain News, 5 June 2004; Detroit Regional Chamber, “Impact of Offshore Outsourcing on the Manufacturing Sector in Michigan and the United States,” June 2004. Accessed at http://www.detroitchamber.com/MPC/, 6 August 2004. 60 Free and Fair changes in policy will affect the trade deficit, with the implicit understanding that it is better to run a trade surplus – even though there's no correlation between the balance of trade and national income. Debates about trade inevitably revolve around the question of jobs – even though trade has a minimal effect on aggregate levels of employment. A decade ago, the political debates over NAFTA were framed in terms of job creation and job destruction, despite the fact that every sober policy analysis concluded that NAFTA would not significantly alter the employment picture.11 Even politicians who advocate trade liberalisation do so by focusing on increasing American exports and downplaying imports.12 This ignores the fact that trade is not a zero-sum game; the gains of other economies can also benefit our own. For instance, imports help to lower consumer prices and increase consumer variety. Former Treasury Secretary Robert Rubin observed in his memoirs that when he mentioned this fact in Congressional testimony, a representative told him that he was the first government official to praise the virtues of imports in public. He concluded, “My many discussions with senators, House members, and others… have led me to believe that what is needed is a large-scale, multi-year public relations and education campaign in support of both foreign assistance and trade liberalisation for developing-country exports…. So far, my arguments have been without effect.”13 With this kind of political environment, it should not be surprising that Federal Reserve Bank of Dallas president Robert McTeer, when asked in early 2004 about policy 11 Paul Krugman, “The Uncomfortable Truth About NAFTA,” Foreign Affairs 72 (November/December 1993): 13-19; Gary Hufbauer and Jeffrey Schott, NAFTA: An Assessment (Washington: Institute for International Economics, 1993). 12 For example, a key plank of John Kerry’s trade platform is devoting greater resources to “increase resources for trade enforcement and action at the World Trade Organization.” See “A Plan For Free And Fair Trade,” at as well as, “Trade http://www.johnkerry.com/issues/economy/trade.html, Enforcement: Asleep at the Wheel,” at http://www.johnkerry.com/pdf/trade_enforcement.pdf. 13 Robert Rubin and Jacob Weisberg, In an Uncertain World (New York: Random House, 2003), p. 400. Free and Fair 61 responses to outsourcing, replied, “If we are lucky, we can get through the year without doing something really, really stupid.”14 Breaking the mercantilist mindset Unless the entire country -- particularly the political class -- is required to take an introductory economics course, the mercantilist mindset will be hard to shake. Politicians have promoted trade through a mercantilist lens since the early days of the Republic, and for good political reasons. Couching trade expansion as a means of boosting exports evokes a sense of economic nationalism that has long been popular with voters.15 Furthermore, jobs created through exports represent the kind of tangible, direct anecdotes preferred by politicians seeking re-election. The problem is, anecdotes are incomplete narratives that fail to include opportunity costs. The opportunity costs of jobs saved through trade barriers are jobs lost in sectors rendered less productive by higher input prices – not to mention higher consumer prices, a lower rate of return for investors, and reduced incentives for innovation. Trade protectionism amounts to an inefficient subsidy for uncompetitive sectors of the economy. For politicians, however, anecdotes and narratives will always be more compelling than economic theory. At this point, most laments about the state of political discourse of trade end with a call for politicians to bravely resist the siren song of protectionism. This is not of much use. Politicians are, well, politicians – they will be understandably reluctant to buck the beliefs of large swathes of constituents. In November 2002, George W. Bush slapped on steel tariffs when his approval rating was at 85%, despite substantial opposition from his principal economic advisors.16 Why should it be expected that Bush – or any president, 14 Quoted in Bloomberg, “Delta Air, General Electric Say Creating Jobs Abroad Helps U.S.,” 23 February 2004. 15 For one exploration of this, see the discussion of Hamiltonian foreign policy in Walter Russell Mead, Special Providence (New York: Knopf, 2002), chapter four. 16 Ron Suskind, The Price of Loyalty (New York: Simon & Schuster, 2004), p. 216221. 62 Free and Fair for that matter – would suddenly be willing to speak truth to power on trade when their approval ratings are below 50%? Rather than exhorting politicians to be brave, advocates of free trade need to provide concrete strategies that resonate with the public. For the United States, there are two viable strategies – and they are not mutually exclusive. The first is to marry trade expansion with programs designed to help those made worse off from an open economy. The second is to link trade policy to the promotion of America’s grand strategy. The chief problem with boosting public support for trade liberalisation is not one of economics but psychology – people feel that their jobs and wages are threatened. This fear is not irrational for risk-averse Americans. Even if the probability of losing one’s job from import competition or offshore outsourcing is less than three percent,17 the costs of losing one’s job are great enough to provoke concern. This is a classic insurance problem – the key is to guarantee the losers that they will be covered. This kind of insurance problem is amenable to government assistance. One obvious move would be to expand the Trade Adjustment Assistance (TAA) program in the United States to cover service sector positions, as well as retooling the TAA program to provide more transferable skills for workers. The creation of portable retirement accounts and health-care benefit packages would further cushion the blow of trade-related unemployment.18 Additional investments in public goods like basic science and ongoing education would increase the attractiveness of American workers as well. Furthermore, such investments would not be expensive – precisely because the number of affected workers is far smaller than commonly thought. The private sector can also invest in targeted insurance policies to 17 18 Schultze; BLS Douglas Irwin, “Free Trade Worriers,” Wall Street Journal, 9 August 2004. Free and Fair 63 offset the transition costs to workers directly affected by foreign competition. IBM represents an exemplar of this kind of practice. In late 2003 the firm announced plans to offshore 3,000 IT jobs from the United States, prompting considerable criticism from employees and commentators – even though the firm also planned a net increase in employment in the United States. In response, the firm announced the creation of a two-year $25 million retraining fund for its employees who fear job losses from outsourcing. It also created new internal transfer policies that encouraged managers to retrain and hire IBM employees affected by outsourcing, reducing the estimated number of displaced workers by 33%.19 The McKinsey Global Institute estimates that programs like these could be created for as little as four to five cents per dollar saved from trade expansion and offshore outsourcing.20 Undoubtedly, such policies would help to foster public support for trade expansion. The GMF poll found the following statement generated 71% approval among Americans, and roughly equal support from trade optimists and trade pessimists:21 International trade has both positive and negative effects. International trade brings a lot of benefits -lower consumer prices, more choice -- but also causes a lot of disruption in millions of workers' households with people losing their jobs. With the world becoming a smaller and smaller place, we need to make trade work for everyone. For us here in the United States and Europe, that means we need to invest more in skills and technology so that our economy becomes more flexible and innovative -- that is where our best opportunities lie for the future. 19 Stacy Cowley, “IBM Starts Fund to Aid Displaced Workers,” ComputerWorld, 2 March 2004; William M. Buckley, “IBM Now Plans Fewer Layoffs From Offshoring,” Wall Street Journal, 29 July 2004. 20 McKinsey Global Institute, “Offshoring: Is It a Win-Win Game?” San Francisco, CA, August 2003 21 Reconciling Trade and Poverty Reduction, p. 26. 64 Free and Fair This logic echoes recent statements by Federal Reserve Chairman Alan Greenspan on coping with the global economy.22 The second way to improve public attitudes towards trade is to stress its importance to foreign policy as well as economic welfare. One of the reasons the United States government persistently advocated for trade liberalisation during the Cold War era was the bipartisan consensus that a liberal trading system aided the cause of containment.23 As historian Diane Kunz has observed: “Economic diplomacy served as America’s first line of offense in the Cold War.”24 There was another reason, however – advocates of trade liberalisation knew that the security linkage was an effective tool in coping with protectionist pressures.25 Current American policymakers are cognizant of the connection between trade and grand strategy. The 2001 National Security Strategy contains the following:26 [T]he United States will use this moment of opportunity to extend the benefits of freedom across the globe. We will actively work to bring the hope of democracy, development, free markets, and free trade to every corner of the world. The events of September 11, 2001, taught us that weak states, like Afghanistan, can pose as great a danger to our national interests as strong states. Poverty does not make poor people into terrorists and murderers. Yet poverty, weak institutions, 22 Alan Greenspan, “The critical role of education in the nation's economy,” 20 February 2004. Accessed at http://federalreserve.gov/boarddocs/speeches/2004/200402202/default.htm, 6 August 2004. 23 Destler, American Trade Politics, chapter one; Judith Goldstein, Ideas, Interests, and American Trade Policy (Ithaca: Cornell University Press, 1993), p. 164. 24 Diane Kunz, Butter and Guns: America’s Cold War Economic Diplomacy (New York: The Free Press, 1997), p. 5 25 Thomas Zeiler, “Managing Protectionism: American Trade Policy in the Early Cold War,” Diplomatic History 22 (Summer 1998): 337-360. 26 National Security Strategy of the United States – accessed at http://www.whitehouse.gov/nsc/nssall.html, 6 August 2004. Free and Fair 65 and corruption can make weak states vulnerable to terrorist networks and drug cartels within their borders. The security rationale is behind the administration's exertions on behalf of the Doha round, as well as President Bush's May 2003 announcement to create a U.S.-Middle East free trade area by 2013. The current U.S. Trade Representative Robert Zoellick has been pushing this line of argumentation since the September 11th attacks – on September 20th, 2001, he argued:27 Economic strength -- at home and abroad -- is the foundation of America's hard and soft power. Earlier enemies learned that America is the arsenal of democracy; today's enemies will learn that America is the economic engine for freedom, opportunity and development. To that end, U.S. leadership in promoting the international economic and trading system is vital. Trade is about more than economic efficiency. It promotes the values at the heart of this protracted struggle. Despite this recognition, this type of strategy requires the active participation of the only official with a large enough bully pulpit to move public opinion – the president. The GMF poll shows that this line of argumentation is convincing to more than 58% of Americans – a strong but not overwhelming number. However, the poll question, as phrased, failed to make the necessary link between current economic statecraft and future military statecraft.28 Despite (or because of) its status as the global military hegemon, the U.S. is currently overcommitted in its overseas 27 Robert Zoellick, “Countering Terror with Trade,” Washington Post, 20 September 2001, p. A35; see, more recently, “When Trade Leads to Tolerance,” New York Times, 12 June 2004. 28 The question was: “Times are different now that terrorism has become a big part of our lives. While 9/11 and the attacks in Madrid cannot be explained by poverty alone, underdevelopment is a big part of the story. We are already doing a lot like giving aid. Another thing we could do is welcoming developing countries into the international trade community. That way, they can lift themselves out of poverty and make the world a safer place. That will be in everyone’s interest.” 66 Free and Fair deployment of military personnel.29 Trade expansion can and should be presented as part of a long-term solution to prevent additional uses of force in the future. Contrary to the conventional wisdom, polling in the nineties suggests that this argument resonates with a broad majority of the American public.30 The aforementioned Pew/CFR poll showed that the only foreign policy issue considered more important than protecting jobs was protecting against terrorist attacks. Tying trade to security prevents protectionist politicians from using economic nationalism to advance their arguments, indirectly reducing public support for higher trade barriers. As with the Cold War, a strategy that markets economic diplomacy as “America’s first line of offense” would be effective in blunting protectionism and promoting liberalisation. Conclusion Advocates of trade expansion often feel like they are stuck in a public policy version of Groundhog Day, forced to refute the same fallacious arguments decade after decade.31 Educating the public about the benefits that come with trade is a noble and worthwhile effort – but alleviating the public’s anxieties will work even better. In the United States, this boils down to two strategies. First, marry the case for trade expansion with a similar expansion of insurance programs to cushion those who lose out from greater market competition. Second, emphasis that the benefits of liberalisation positively affect international security as well as the global economy. 29 On the greater willingness of the United States to rely on force, see Robert Kagan, Of Paradise and Power (New York: Alfred A. Knopf, 2003). See Steven Kull and I.M. Destler, Misreading the Public: The Myth of a New Isolationism (Washington: Brooking Institution, 1999), chapters two and five. 31 Julian Sanchez, “Lou’s Blues,” Reason, 30 October 2003. Available at http://reason.com/links/links103003.shtml. 30